Business Angel Blog

I have had the pleasure of supporting an initiative based in Manchester called EnterPrize . The idea is to help companies raise ‘their game’ and grow.

It has been a very interesting experience for me and I have enjoyed spending the last two days providing one to one coaching to five different businesses who were all finalists (that is part of their prize readers – spending time with me!)

The reason I have loved working with these people is that they all come from different backgrounds and are engaged in various fields. Building signs to Arabic clothing to domestic services and a great one providing a fitness service for non-gym goers. This makes for such an interesting experience for me and I can say that I felt revived by it.

One of my business heroes, (and a good friend) is a guy called Chris Gorman. He has a very simple mantra which says “work hard, play hard and always give something back”. He remembers how he was supported by Sir Tom Farmer when he started in Business and in turn he now offers support to as many start ups as he can manage. I could not by any definition be considered a success yet, but I do feel that I have benefited enormously from certain people providing me with lots of support and encouragement from time to time.

If you are an entrepreneur with some experience (just one year will do it!) please get involved in a local initiative to support start ups. Even if you can only spare one hour every month – please do something. I can promise you will find it very rewarding and I can guarantee you will learn lots and become a better business person as a result of putting something back.

You will also benefit from an enormous amount of goodwill which will have a business benefit. One of my very first blogs was Being nice as a business strategy. It remains 100% true!

Happy Giving!

Companies do of course need to raise money in more than one round, but most early stage investors are nervous about the number of rounds (especially the unplanned ones!) and are obsessed with the valuation achieved in each of these rounds.

As an investor you need to pay very special attention to the cashflow forecasts a business produces to understand

1)     When the business is likely to run out of cash

2)     How much money it will need to raise

3)     What the valuation is likely to be

As an Entrepreneur you have to be aware of the importance of pre and post money valuations (something that it took me a long time to get my head round!)

Pre-money valuation is the valuation a business has before it raises money in a particular round of fund raising. Post money valuation is the value of the business after it has raised money.

In simple terms, existing investors will be focused on pre-money valuation and new investors on post-money.

Let me illustrate using two examples from real life.

I invested £45,000 in a business that was valued at £1.2m before I put my money in. So the £45,000 number on its own with the £1.2m tells me nothing about my stake. The post money valuation was £2.25m (that is the round raised £1.25m) this means that £45,000 bought me exactly 2% of the business.

The business then looked to raise another £500,000 at a pre-money valuation of £3m (so therefore my stake was now valued at £60,000 – 2% of £3m). However – as is often the case if money was raised at a pre-money valuation of £1.5m – my stake would only be worth £30,000 and if £750,000 was raised I now own a lot less of a business which is worth the same (post money valuation of £2.25m). This is what I call death by a thousand cuts. You may start off with 10% of a business, but after successive fund raising rounds, you may be down to 2%.

I am never worried about the size of my slice of the cake but always about the size of the cake. For example I recently invested £25,000 with a post money valuation of £15.6m (so I only had 0.16% of the business to start with). That business recently raised a further £7m but at a pre money valuation of £25m – so my 0.16% is now valued at £40,000. So although my stake is significantly down – who cares!

As an Entrepreneur, be prepared to explain when you will raise more money and at what valuation to investors coming in at this stage. You will also need to be clear as to why the business will be worth more.

Of course, it doesn’t always work that way. And if investors do get diluted down – your investors should comfort themselves with the fact that they would rather own a small % of a business worth something than a large % of a company worth nothing!

Readers familiar with my blog will know that I like to back entrepreneurs that may have failed in a past venture as it normally leads to a greater maturity. However this does come with some important caveats.

The first thing I look for is evidence that a person involved in failure has learnt something from the experience. Sadly this is not always the case.

I also wanted to say that if someone fails more than three times, I tend to be very sceptical (unless there are very good reasons) about the persons capacity to learn and change their behaviour. What would persuade me very strongly to back someone with multiple failures behind them is if they can demonstrate that they still have the confidence of some of their original backers. This speaks volumes to me.

A key skill for any aspiring Entrepreneur would be to manage their stakeholders. Sadly, this is a skill that in my experience many people lack. As I said, I really don’t mind failure; it is part of the business, but I will not tolerate being kept in the dark.

The lesson is that whilst you must always plan for success you must be prepared for failure and if you maintain honesty and integrity people will always back you time after time.

So if at first you don’t succeed – make sure you succeed at being true to yourself!

One of the key differences between getting money from the first three F’s (friends, family and fools) to angel investors is the need for legal documentation.

Most angel investors will insist on a legal agreement which governs the relationship between them as minority shareholders and the company. The main agreement is going to be the Investment Agreement. Potential shareholders will also want to see the Articles of Association to see what the company can and cannot do without getting permission from shareholders (and how many shareholders need to permit this action).

If you are not careful as an Entrepreneur you can find yourself spending a small fortune (£5,000 plus) on getting some very basic legal documentation in place. This is money which a start up on limited resources would much rather spend in other areas I am sure.

Nonetheless, it is important that you have signed documentation in place. It is important to remember at all times that you will have a contractual and therefore legal relationship with shareholders. I try to (and 90% of the time I succeed!) have a very friendly relationship with the companies I invest in but I need the comfort of having our relationship defined in legal terms.

Given the cost of acquiring legal documents, I have noted a few websites which give you access to the key documents you need for free. One of them is on the BBAA website http://www.bbaa.org.uk/index.php?id=147

Another site which is a little out of date but well worth having a look at is http://www.tomslaw.com/?allowin=1 it is run by a not for profit organisation (FISMA) and is a much more extensive bible of documents.

Please be aware though that these are generic documents based on UK law and because they are free there is no recourse if things go wrong – so please do use with caution!

They are a very good start though and I have used some of the documents from Toms Law myself. In our case, we adapted the skeleton for our purposes and then got it reviewed by a lawyer (it cost us £500 not the normal £3,000)

Hope this is useful advice.

I’ve written a blog before called In Defence of the Banks and one of the most common areas I am asked to help start ups with is in the meeting with the bank to try and obtain Loan Finance.

Firstly, despite all the concerns about the Credit Crunch (credit crunch explained) there is still a healthy appetite amongst both investors and banks to finance, lend and support small businesses. Many Entrepreneurs simply do not help themselves when making an application for a loan.

I hope this blog helps in your preparation to see a bank – please do let me know if it does – case studies are always welcome!

The first thing I should say which is a bit obvious is that banks want to lend money! People do forget that so when you go in asking for a commercial loan – expect the answer to be yes. If it is a no – try and get feedback in terms of what you need to do to get a yes – and then try elsewhere! In my experience trying to get a bank to change its mind is very hard. Better to start afresh.

Here are my top tips!

1) Have a presentation prepared. Banks want to see if you are a credit risk. Although it is unfair, they may judge you negatively if you come across as unprepared and without evidence of clear thinking. It does not have to be a PowerPoint – but it does have to clearly laid out and flow. (Would you like me to post a template?)

2) Make it clear you have costed out what you are spending the money on. Showing quotes can really help

3) You need to demonstrate that you or other shareholders are putting in some money as equity. It is fair enough for the bank to say “why should I risk my money – when you are not prepared to risk yours?”

4) Have complete mastery over the numbers. You really must. You must be prepared to justify every single assumption

5) Present a range of scenarios. You need to demonstrate that even in the worst case; the bank will get its money back.

6) If possible have an accountant or a competent finance person with you. I realise it is not always possible, but it really will make the bank feel comfortable.

7) Have a clear vision for the business which extends beyond the life of the loan or overdraft. Banks are more likely to lend to you if you can demonstrate you can have a good commercial relationship with them over a long period of time.

Listen and ask lots of questions. I am amazed at how many people in sales scenarios don’t listen to the person they are selling to! (this is perhaps for another blog)

9) Make sure you are not asking them for equity funding. It must be debt funding. For clarity on this read in defence of the banks. In a nutshell, you must be able to provide them with a high level of comfort that they are not taking a risk

10) Be positive! Very glib to say but desperation really does not work with a bank. I went through a horrendous period recently where it was like a house of cards and was very close to all collapsing. In the midst of all of this, I went to see a bank to get a business refinanced. Had I failed, the consequences for the business and for me would have been… (lets just say this blog would be called something other than www.businessangelblog.com I can honestly say that meeting was one of the hardest of my career in terms of emotions. I just had to keep it together and stay calm and resist the temptation to fall on my knees and say “Please just lend me the bloody money and rescue me!”

I hope this helps. If you have other tips or golden nuggets to pass on, please do let me know

When I was at Mr. Kipling cakes I was employed as a sales manager looking after a team of van sales people who were paid a basic and a commission. One of the key targets for managers was to ensure that the commission never got to more than 30% of a salary package! 

Years later when I was at a start up company as an Account Director I was actually fired essentially as I was earning too much money as a sales person (this came out later in the wash – the business has since gone into administration). I was at a meeting last week with an Entrepreneur who wants to get rid of his sales director – because he is earning a huge amount of money!

It occurred to me that this seems to be a silly way to go round things. Many managers are obsessed with controlling the pay structure so that the hierarchy is maintained. Again, when I was at Pricewaterhouse Coopers as a sales manager, some partners did have a problem with the fact that I was earning more than them (they omitted the fact that I was generating over £2m in new sales!) Companies seem to create pay structures that incentivise sales people – but then when they hit targets they begrudge paying the commission.

The top earner in a start up (first three years) should always be a sales person. Actually a good indicator for me as an investor on how well a company is doing is to simply ask how much the sales team (if there is one) is earning – and what percentage of the earnings is commission. As readers of this blog will have noted, I am not obsessed with a company making a profit in its first couple of years – but do need to see a strong ability to generate cash.

If you are obsessed with being the top earner, you will not make a good entrepreneur. You need to be obsessed with generating wealth, which is very different from generating an income for yourself.

My lesson from this blog to company managers is simple; set up a commission structure for your sales team that is realistic for them to hit and is profitable for the company even after paying the bonus. Once this is in place, do not begrudge them earning the commission – support them in making your business worth more!

�

There is a strange problem facing businesses that are in ‘cruise-mode’. That is when the big challenge such as launching the business has been met. There are parallels with how we are as people.  We tend to wish for the problems we encounter on a daily basis to ‘evaporate’. We long for a time when we can recuperate, rest, chill, relax etc and put all our problems behind us. And yet most of the Entrepreneurs I know find that their performance drops once a goal they have been fixated on is achieved.

It is like losing weight. It is easier to lose weight than to maintain a stable weight. When losing weight, you are focused on a goal and you are working towards progress and measuring your success on a regular basis. As you are measuring progress towards your goal, you get reignited with determination and energy to continue to making progress. And yet once you have achieved your goal, the focus drops and ‘maintenance’ is just not a galvanising objective which makes you get up in every morning. Needless to say the weight will creep up again.

So once you are up and running in business, how do you continue to motivate yourself and set new goals for the business?

1) You can set yourself a valuation target. What happens when you achieve it? And what valuation are you talking about?

2) You set yourself a profit target. Do you stop working the day you achieve that number?

3) You recognise that your skill set is in setting up and not in running a business. Very few founders of businesses make successful operators. It tends to be the case that this transition is painful rather than smooth. As an investor and business angel, I always ask the founders of a business what their personal exit plan is. The answers are always very revealing.

4) You set yourself through the business a new challenge. You can make the most of your entrepreneurial skill set by leading the charge into new markets or new areas, whilst giving someone else day to day responsibilities.

5) You recruit a new team to learn from. Lord Bilimoria (Cobra beers) always makes a point of recruiting people who he believes are better than him and add to the business. I have sadly met many entrepreneurs who will only recruit glorified ‘assistants’. Would a top notch candidate really want to work for someone like Alan Sugar?

6) A great goal setting technique that I use is to work backwards. That is I see what I want to be doing in 5 or 10 years time and then work backwards in the sense of where do I need to be after three years and what do I need to be doing now to prepare for that goal.

7) In coaching a powerful technique used to get the fire and passion back in people is to ask coachees to write an obituary. It might sound morbid – but try it. Write about what you wish someone would say about you after you have gone. This will tell you what really matters to you and what gives your life meaning.

You can only procrastinate when you have goals to achieve. Just remember procrastination is so much better than doing nothing!

Agreeing to invest in a business is relatively easy. Agreeing to accept an investment is not as easy as it involves giving away part of what many entrepreneurs feel is their baby.

The first thing I should say to entrepreneurs is that they should think long and hard about whether or not to accept going down the investment road. Control is a big issue for many of you. But recognise that 51% ownership is meaningless. I have a very simple view, the moment you accept just £1 of external money, you have a legal and moral obligation to run your business in the best interests of all shareholders. I will typically not invest in a company where the management team have more than 70% of a company. No specific reason for that number, but I have found in the past that the business ‘owner’ does not recognise that no matter how small another investor is – they have the same duty of care and attention to them as they do to themselves.

So this is a short post – but I hope an important one. If you accept external investment please remember this means

1) You cannot use the company as a personal bank account

2) Every penny spent has to be to further the interests of the business

3) You have to produce meaningful financial information on a regular basis

4) You have legal obligations to always act in the best interests of shareholders. Especially if someone offers to buy the business!

5) The shareholders have the right to ask you lots of questions and expect answers!

6) You need to have at least one non-executive director on the board and recognise what that means

Having said all of this, most businesses find that external investors can add real value to a business and help it grow rapidly.

Let me ask you, would you rather own 100% of a corner shop or 1% of Tesco?

If your answer is the corner shop – because you want control and the lifestyle – external investment is not for you!

One of my favourite books in recent years has been Freakonomics. Anyone who has read that book will realise that the title of this blog is a homage to that great piece. I have always had a problem doing business with people who wear religion like a badge. Most of the truly religious people I know have a personal relationship with their god and see it as a private matter. I just find that people who advertise their beliefs have an arrogance that allows them to excuse themselves from conforming to the everyday norms of right and wrong that people take for granted.

My definition of a fundamentalist is someone who has read just one book and believes that this one book contains all the truths and knowledge in the world. This book may be a holy one such as the Bible, The Koran or a political one such as The Communist Manifesto or Reflections on a Revolution in France. The world is simply more complicated than that.

What does all this have to do with business? I have come across many people who I would describe as business ‘fascists’. These are people who have been stuck in the same industry or business for many years and rigidly refuse to accept new ideas or new ways of doing things. Like Pascal famously said

“Nothing leads to failure like success!”

Indeed I have a very hard time working with entrepreneurs who are successful in one field, because they believe they know all there is to know about business. These Entrepreneurs tend to have low quality staff working for them as talent needs to flourish and of course try new things which may or may not work. The problem then arises when these Entrepreneurs want to become business angels and invest in a business. My advice to companies is to stay away from accepting any investment from a business fascist.

How to spot a business fascist

1) They have only had success in one limited field
2) They run their business like a fiefdom
3) They have a massive ego (find out who does their PR for them – and how much that would cost)
4) They love the sound of their own voice
5) They will only invest if they are made chairman or a Non Exec
6) You can find few people who have a good word to say about them
7) They have a very weak network. Networks are a very good measure of how people are seen – not what they are worth
When they talk to you – you feel you are being preached to One of my favourite quotes sums up my problem with fundamentalists very neatly.

“Principle is the enemy of Reason” (Nietzsche)

There are three Financial Statements that comprise a set of accounts but as an investor you should only pay very close attention to one; cashflow. If you are pitching to a bsuiness angel – make sure you have complete mastery over this statement.

The Profit and Loss Statement and the Balance Sheet can easily be manipulated to show the numbers you want to and will always be subjective (within reason – unless you work for WorldCom or Enron!) Cashflow should be a 100% objective statement that really allows someone to understand the cash cycle of a business quickly.

“Lack of profits is like a cancer, it will eventually kill a business unless cured. Lack of cash though is like a heart attack – it can kill a business straight away”

This quote is very apt. Most people still don’t realise that most businesses which go bust are profitable. What made them go bust was a lack of cash. Any Entrepreneur pitching to me must demonstrate to me that they understand the difference between cash and profits. There are many people who don’t understand this difference. (If you want an explanation please ask)

The Fund which I am a cofounder of Flight & Partners, takes advantage of being able to buy companies which are profitable but have simply run out of cash – so in a sense, one of my businesses does rely on cashflows going wrong.

A cashflow statement should simply show on a monthly basis for the first two years of a business the following;

1) How much cash is coming in from where and when

2) How much cash is being spent, on what and when

As an angel investor in a start up, your only short term concern should be can the business survive for the first two years? (Most failures occur within this period.) Don’t worry about things like profit at this stage!

You should also always ask to have the cashflow forecasts sent to you via email. You need to flex it – in particular you need to see what would happen if

1) Customers take an extra 30 days to pay

2) Any additional investment monies take an extra 3 months to come in – again a lot of businesses fail between fund raising rounds

3) Revenues take twice as long to build up

4) Costs are 25% higher

If the business can survive the above, it has a good chance of making it. You can then turn your attention to trivial matters like profit!

As a final anecdote from experience, I did invest in a business which did not raise enough money to survive more than six months. What it showed though was that it wanted to raise money again depending on hitting certain milestones and that if money was not raised, it could simply hibernate and carry on operating on minimal funding (£1k per month). Given these facts – I was happy to invest.